I work as a Research Scholar at the Center for Health Policy and Inequalities Research at Duke University. I also am an Adjunct Scholar at American Enterprise Institute and Mercatus-Affiliated Senior Scholar. Having been trained in policy analysis at the Pardee RAND Graduate School, I have decades of experience in evidence-based health policy at the federal and state level, specializing in health services regulation and the social burden of illness. I've taught health policy and the politics of health care in the Terry Sanford Institute of Public Policy, the Duke School of Medicine and the Fuqua School of Business at Duke. My latest book is "American Health Economy Illustrated."

The author is a Forbes contributor. The opinions expressed are those of the writer.

What Hurricane Sandy Teaches Us About Medicaid, Medicare

With Hurricane Sandy slated to cost the nation more than $50 billion, policymakers are scrambling to figure how to contain the rapidly rising costs of disaster relief. U.S. taxpayers have spent $250 billion over two decades helping states like Florida and Louisiana recover from natural disasters. In many ways, how the nation has elected to handle to costs of natural disasters mirrors many of the misguided choices that have guided health entitlements such as Medicare and Medicaid off the fiscal rails.

First, by keeping premiums artificially low, the program encourages more building in flood-prone areas and disincentivizes homeowner investments in making their homes less prone to damage (e.g., elevating the house or strengthening the roof). Risk-based premiums from private companies offer a more promising path for encouraging personal responsibility. By charging more for riskier choices, such premiums discourage people from taking a lot of risks. For example, auto insurers routinely surcharge drivers who get speeding tickets both to deter behavior that elevates the odds of an accident and to ensure that speeders as a group self-finance their own risky behavior rather than having it cross-subsidized by more responsible drivers. That mechanism no longer exists when government subsidizes insurance in the highest-risk flood areas; likewise, we might consider whether Medicare should adopt the higher premiums for smokers that even Obamacare permits in the private insurance market.

Damage from hurricane in Pensacola in 1906 (Photo credit: Wikipedia)

Second, because premiums are so low, NFIP is woefully underfunded—having had to borrow $18 billion from the U.S. Treasury to cover claims after 2005 and 2008 hurricanes (and will soon have to borrow many billions more for Hurricane Sandy). All told, the program’s overall liability now amounts to $1.25 trillion. This may seem a pittance compared to the $106 trillion in unfunded liabilities facing Medicare, but the idea is the same.

Unless the flood insurance program is significantly reformed, the unfunded burden will predictably grow larger over time. Some of the most egregious problems with the program were addressed by changes to the program made last July. However, now policymakers in Florida are pushing for a national insurance pool that would socialize these costs even further—raising costs on Americans living in less risky areas while saving homeowners in Florida an average of $535 apiece, according to the actuarial consulting firm Milliman, Inc..

Third, the program forces those who live in non-risky areas to subsidize the decision of others to live in flood-prone areas. Of the 5.6 million people with flood insurance coverage, roughly 1 million get it for less than half the true price, because they live in houses built before flood hazard maps were created. Need an example on a more local scale? Since 1979, at least $80 million in inflation-adjusted federal dollars have gone to fixing the costs of storm-related damage on Dauphin Island, Alabama. That amounts to $60,000 for every permanent resident—quite a gift from other U.S. taxpayers!

There are two separate issues here. Like Medicare, the program is a “universal” entitlement that subsidizes premiums for rich and poor homeowners alike. In these days of frantically looking for ways to reduce federal spending to avoid going over a fiscal cliff, does anyone think that subsidizing flood insurance premiums for the beach houses of 1 percenters should be an urgent federal priority? For those who need assistance, means-tested vouchers would be a fairer way of targeting scarce federal resources to those who most need them.

But what about Medicaid? The lion’s share of the cost of rebuilding schools, hospitals, roads, bridges, utilities and transportation services is, under the Stafford Act, borne by Uncle Sam, with only 25 percent of such costs covered by state and local governments. This matching fund arrangement—a close cousin of the approach used to jointly fund Medicaid—creates some predictable adverse consequences.

First, having someone else pick up three-quarters of the cost does not incent state and local governments to necessarily spend these funds wisely.

If state and local officials had a fixed amount of dollars to spend, along with maximum flexibility in how to spend these dollars so long as they were tied to the purpose of disaster recovery or indigent medical assistance, this would greatly improve the effectiveness and efficiency of both Medicaid and national disaster recovery efforts.

In light of the myriad of problems just described, some experts have recommended that we simply end federal flood insurance. We do not necessarily need to end Medicare or Medicaid entirely, but we do need to fundamentally overhaul both programs if we want them to be sustainable for future generations.[1] We would be well-advised to do this before the tsunami of red ink arrives to inundate us with a fiscal catastrophe of unprecedented magnitude.

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